In the mystery of Canada’s missing wages, all clues lead to Alberta

In the mystery of Canada’s missing wages, all clues lead to Alberta

The Bank of Canada might have solved the mystery of the missing wages.

First, the backstory.

Canada’s unemployment rate spent most of 2018 below six per cent, dropping to a record low of 5.6 per cent in November and staying there in December. Statistics Canada estimates that there were more than 551,000 job vacancies in the third quarter, 18 per cent higher than a year earlier.

Scarcity is understood to inspire hostile behaviour. Shortages of food induce riots and a limited supply of houses causes bidding wars. When employers can’t find workers, the textbooks say they will offer higher salaries. The opposite appeared to happen in Canada. Annual wage growth, which had accelerated from stagnant to mediocre by the end of 2017, started decelerating again, according to various measures.

Stephen Poloz, the Bank of Canada governor, has been working hard to understand the post-crisis labour market. When the jobless rate plunged, some on Bay Street quickly called for interest-rate increases. Poloz resisted. He argued that the headline numbers masked ongoing weakness; depressed measures of youth participation and elevated levels of long-term unemployment showed that slack remained, he said.

Wages also were an important part of the story, given their correlation with inflation. Paycheques stagnated in 2015 as the collapse of oil prices interrupted Canada’s rebound from the Great Recession. The central bank cut interest rates twice, and the economy eventually got back on track. The central bank’s preferred salary gauge, an index called wage-common, climbed to three per cent in the fourth quarter of 2017, the highest since 2011. But the momentum waned. The indicator decelerated to 2.8 per cent at the start of 2018, then dropped to 2.6 per cent and 2.3 per cent in the quarters that followed.

Three per cent is seen as a magic number for wage growth. It’s a pace that both keeps up with inflation and leaves workers with a little something extra. Canada got there, but couldn’t hold on. Andrew Scheer, the Opposition leader, appeared to be on to something with political messaging that emphasized that Canadians should be doing more than just getting by.

Scheer’s choice of rhetoric might have been telling us something about the economy.

It was tempting to dismiss the Conservative twist on positive economic numbers; record low unemployment is record low unemployment, after all. But consider where the party’s audience lives. Its base is in Alberta and rural Canada, and wage growth in those places has been disproportionately weak, especially in the oil-producing regions.

Poloz made a point of flagging some new detective work when he met with reporters on Jan. 9 in Ottawa. Staff economists dug into the wage-common data and created an index for Alberta, Saskatchewan and Newfoundland and Labrador, and a separate one for the rest of the country. The results, released as a chart in the Bank of Canada’s new quarterly economic outlook, suggest that weaker crude prices explain the deceleration in wage growth. Outside the oilpatch, salaries were essentially unchanged, posting an annual increase of 2.6 per cent in the third quarter.

There is supporting evidence that the Canadian economy has split in two.

PayScale, the Seattle-based collector of salary data, publishes a quarterly wage index. Its latest update, released on Jan. 9, puts the annual increase in Canadian nominal wages at 1.9 per cent, “pretty strong,” according to Katie Bardaro, the firm’s chief economist. But like Bank of Canada’s wage-common, that figure hides big regional differences. Annual wage gains for Vancouver, Toronto and Montreal were 3.2 per cent, 2.4 per cent and 2.3 per cent, respectively; Calgary was 0.6 per cent and Edmonton was 0.7 per cent.

“The growth isn’t enough to be meaningful for a lot of workers,” Bardaro told me in a telephone interview on Jan. 11. “The tightness in the labour market isn’t evenly spread out.”

To be sure, wages might be keeping up with inflation, but it’s been a long time since they consistently reached that magic level of three per cent. “The bigger puzzle is why wages haven’t been moving for 30 years,” Wayne Lewchuk, an economics professor at Hamilton, Ont.-based McMaster University, told me in a telephone interview on Jan. 11.

The reasons likely include the decline of unions, globalization and automation. Demographics might be playing a role, as older employees could value stability over leaving their current jobs to get a raise. Lewchuk said he thinks workers have grown afraid to ask for more money. Bardaro said PayScale surveys show that companies are providing bonuses instead of higher base pay, probably because they are worried about the economic outlook.

Canada’s central bank might be willing to instill some confidence by taking a pause from raising interest rates. Policymakers said on Jan. 9 that they still thought borrowing costs needed to rise, but for now, only “over time.” In other words, there’s no rush.

Still, the wage puzzle may no longer represent a reason to keep borrowing costs low. The Bank of Canada sets policy for the country, not specific regions. And in the majority of the provinces, wages are growing again.